Anadarko Petroleum (APC) recently released (pdf) its first-quarter earnings, coming in above analyst expectations at $0.92 cents per share on revenue of $3.45 billion. Analysts expected $0.84 per share. Its first-quarter profits were pushed higher on the resolution of a tax dispute with production sharing partner Sonatrach in Algeria. The resolution provides for Anadarko to receive additional crude volumes worth about $1.8 billion over the next 12 months and $2.6 billion over the remaining term of the production-sharing agreement.
Overall, there was little not to like about Anadarko's first-quarter earnings, especially given that as of the end of the first quarter, Anadarko had $3 billion cash (pdf) in hand. This gives Anadarko flexibility to move quickly when needed and indicates that the company is in a position to maintain its current dividend
Hedging Against U.S. Dry Gas Prices, Looking to LNG, Oil
Anadarko is reducing its natural gas production in the U.S. as natural gas prices in the U.S. continue to flirt with record lows. Anadarko's plans include rig reductions in the Marcellus shale and at Greater Natural Buttes in the Uinta Basin. In the first quarter its natural gas sales were $573 million, as opposed to $854 million in the first quarter of 2011. Its natural gas sales volumes in 2011 remained essentially flat (pdf) since 2008, and Anadarko expects volumes to remain flat through 2013. In the meantime, its liquids volumes have increased at 40% or greater during the same time period. I think these are smart moves on Anadarko's part given that U.S. natural gas storage capacity is stretched and storage costs will only further erode margins while prices are low.
Anadarko is reporting (pdf) daily sales volumes of 704,000 boe per day, 75% of which is oil. This dwarfs production from competitor Apache (APA), which reports 38,228 boe per day. Anadarko's numbers were driven in part by the start of production at Caesar/Tonga in the Gulf of Mexico, which is now producing 45,000 boe per day. Year over year, Anadarko saw its best numbers in Texas. At the East Texas Haynesville shale growth was 369%, at the Permian shale growth was 92%, and at Eagleford shale growth was 55%.
Deep water drilling continues to be an area of success for Anadarko, as it recently confirmed an extension on the Heidelberg sidetrack in the Gulf of Mexico of up to 1,500 acres. The Heidelberg field is "an emerging mega project" according to Chuck Meloy, Anadarko Senior Vice President, Worldwide Operations. Anadarko is also continuing deepwater exploration and appraisal in Mozambique and Ghana, reporting "exceptional flow rates" in its first-quarter earnings report. Its explorations here contributed to its increased exploration expenses in the first quarter, reported as $244 million as opposed to $179 million in the first quarter of 2011.
On the Legal Front
As of yet, traders are not being put off from Anadarko over legacy lawsuits directed at Anadarko due to its 2006 acquisition of Kerr-McGee's oil and gas business. Tronox acquired the rest of Kerr-McGee and declared bankruptcy three years later, claiming that litigation and clean-up costs related to Kerr-McGee's legacy spills - which are numerous - hindered its ability to operate.
Anadarko estimates the cost of the newest suit at $525 million, possibly basing its prediction on previous settlements between Kerr-McGee and the EPA. However, I believe that it's a dangerous sign for Anadarko that the EPA allowed a final agreement with the bankrupt Kerr-McGee/Tronox outfit to proceed based on the anticipation that the EPA would receive a percentage of future proceeds from litigation against Anadarko. At the same time, Anadarko is seeing a thaw in relations between the energy industry and the EPA, noting that the recent resignation of an anti-energy EPA regional bureau chief over inflammatory comments about the EPA's role in regulation is a step in the right direction.
Strong International Assets
In 2012, Anadarko expects to use 60% of its exploration capital on exploring and appraising its international assets. I expect that of this, much will be devoted to its positions on the western and eastern shores Africa, given the promising results in Mozambique.
Anadarko holds 6 million gross acres in Mozambique's Rovuma Basin, which include the promising liquid natural gas reservoirs of Prosperidade Field. It expects to certify its proved reserves here in 2013. Current estimates are that the field contains between 17 and 30 tcfe. The field includes the Lagosta and Barquentine discoveries. Anadarko plans to further explore its block here at Golfhino, Atum, and Orca plays, and will test the southern plays Black Pearl and Barracuda sometime between 2012 and 2013.
Royal Dutch Shell (RDS.A) is expanding into Mozambique through acquisition. It recently agreed to purchase UK-based Cove Energy. As Cove Energy was partner in Anadarko's Rovuma explorations, Shell will be a partner with Anadarko on this play once the sale is complete. Other players in this area include Statoil with two blocks and Eni. Unfortunately for Anadarko it appears that Eni's potential reserves off the shores of Mozambique could be even more lucrative, as Eni believes its play contains at least 40 tcfe of LNG.
Outlook
Anadarko traded higher immediately after its earnings report, reaching $76 per share, but has since dropped to around $73 per share with a forward price to earnings of 14.0 and a price to book of 1.8. Shell is trading around $71 per share with a forward price to earnings of 7.1 and a price to book of 1.3. Apache Corporation is trading around $92 per share with a forward price to earnings of 6.6 and a price to book of 1.3. Devon Energy (DVN) is trading around $67 per share with a forward price to earnings of 9.3 and a price to book of 1.3. Occidental Petroleum (OXY) is trading around $91 with a forward price to earnings of 9.6 and a price to book of 2.0.
The Kerr-McGee/EPA/Tronox suit against Anadarko is a matter of some concern, considering that Kerr-McGee operated nationwide and is accused of environmental contamination at practically every location it maintained operations. However, Anadarko's fundamental business remains strong even in a tough quarter where many competitors suffered due to the continued low natural gas prices in the U.S., so it has a strong outlook overall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
